Retail recovery uneven, mixed use favored, ULI panel says

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While San Diego County's retail market continues to improve, mixed-use development may be the key to its future.

The pace of recovery and changing retail market were among the topics at an Urban Land Institute-sponsored session Tuesday at the University Club.

Flocke & Avoyer co-founder Steve Avoyer moderated the program and kicked off the discussion with the question, "Are we out of the recession?"

Kevin McCook, Shea Properties vice president of development, said the answer is yes. Shea recently developed 87,000 square feet of retail space and 92 affordable apartments in the Mercado del Barrio development near the Coronado Bridge.

"We're seeing a lot more LOIs [letters of intent] and a lot more tenants coming into the market," McCook said, adding that mom-and-pop retailers that went into survival mode during the recession have been returning to the scene.

Annmarie Brintnall, retail centers director for design firm Gensler, said her business is up about 20 percent over this time last year.

"That's even true globally," Brintnall said.

Alex Liftis, Terramar Retail Centers senior vice president whose firm holds the lease on Seaport Village and the adjacent Old Police Headquarters property, said it is difficult to tell whether the market has improved.

"This is because there are not only differences from region to region, but property to property," Liftis said.

Even so, Terramar has continued to invest in new assets and redevelop old properties. While Terramar has focused on the roughly 100,000-square-foot Old Police Headquarters project on Harbor Drive that has opened with restaurant and retail space, it also paid nearly $100 million for a 223,000-square-foot Safeway-anchored shopping center in Honolulu at the beginning of the year.

Liftis said with e-commerce continuing to take a bite out of most retail properties, well-managed restaurants — some that might have suffered during the recession — may be coming back.

"That's one of the few things that can't be put in the Internet," Liftis said.

Other retailers aren't so bulletproof. Liftis said he might have been concerned with the status of office supply company Staples (Nasdaq: SPLS), which has been having fiscal difficulties, but "luckily, we only have a couple of those."

McCook added that the uneven recovery has caused some retailers — which might have had stores of about 55,000 square feet, a fairly common size for a grocery anchor — to reduce the footprint to 40,000 or 30,000 square feet, depending on what the site can support.

"We also need to think of these properties as a destination with open space and plazas," McCook said.

Even with the downside of being a brick-and-mortar retailer in the Internet age, Liftis said "the good news about Southern California is there aren't too many bad locations."

This is not to say that developers won't have to adapt to new realities. Moving forward, retail will be coupled with residential uses more often than not, Brintnall said.

Avoyer agreed.

"Most projects today have to be mixed-use," Avoyer said. "It's difficult to pencil retail without residential."

McCook also said mixed-use may be the only feasible route to viability.

"We're so land constrained, almost everything has to be mixed-use going forward," McCook said.

Brintnall added that mixed-use projects have the advantage of helping to create 24-hour cities.

Not everyone is focusing on mixed use. Liftis said Terramar is looking at suburban markets in San Diego and around the country where obsolete office space may be turned into retail.

Whatever is being planned, all panelists agreed that permit processing is becoming more daunting.

McCook said Shea Properties, which is eying retail and mixed-use opportunities in Colorado and Washington state, finds that California has the most difficult processing environments in the country.

"In California, the entitlements alone can take five to 10 years," McCook said, "and I just think it's going to get harder."

"Fortunately, most of our projects are already entitled," Brintnall said.

Liftis recalled that the Old Police Headquarters conversion proposal was first introduced in 2003 and only now is it mostly complete, save for some tenant improvements.

Avoyer noted that another complicating factor here is 18 municipal jurisdictions in addition to the county of San Diego, Port District, California Coastal Commission and other entities that can hold sway over a project. Liftis agreed that all of these layers slow down the process.

"It's a much more tedious process than in other states," Liftis said. "We would love to build in California if we could."

Tom Heffernan, AIA, LEED AP

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